Hoe de staat ons armer maakt

Hoe de staat ons armer maakt
02/12/2019 Karel Beckman

De staat zorgt niet voor ons, maar maakt ons armer. Vooral de armenEen hoofdstuk uit mijn boek-in-wording Freedom of Government and the Friendly Society.

It is not difficult to see why people believe in the benevolence of the state. The state after all is seen to be doing many good things. It takes care of welfare, social security (pensions), education, health care, and many other things. It also builds infrastructure, monitors the quality of our food, provides “public” goods, subsidizes “public” activities, and so on.

Without the state, it seems, the needy would be left to their own devices, good education and health care would only be available to the happy few, inequality would explode, infrastructure would collapse, and we would all be left at the mercy of unscrupulous businessmen.

This at least is what we are told and taught all our lives. It is a point of view that has become so deeply ingrained in us that the mere idea of a world without a state sounds scary and inconceivable.

Yet, in reality, all these good things that the state seems to do for us are in a very fundamental sense only an illusion.

It is true that states control activities such as education, health care, welfare, social security, and many others, even the post office in some “free” countries. They have taken it upon themselves to “organize” all these things. That is to say, they collect taxes from people and spend that money on these activities. They also decide how the activities should be carried out, according to what rules, who should do what, how much money should be spent on them, and so on.

But that’s not the same as providing anything.

The state controls our healthcare system, it doesn’t provide health care. It controls our social security system. It doesn’t provide social security. It controls labor relations. It doesn’t provide minimum wages or safe working places.

It is teachers who teach, doctors and nurses that offer health care, construction workers who build roads, social workers who help the disadvantaged, entrepreneurs that create businesses and offer employment, artists that make art. As to pensions and welfare benefits, people pay for them through taxes and insurance premiums.

If the state was not there, we would still have all these things – but in different forms. We would still have health care and education, but not controlled by the state. We would still have pensions and aid for dependent people, but not controlled by the state. We would still have safety standards and labor relations, but not controlled by the state.

To think otherwise is like believing that we wouldn’t have a mail service if there was no state.

So the question is not whether or not the state does any good things. Of course it does. Who wouldn’t do some good if they could collect hundreds of billions from people and be able to order them around? The real question is whether the poor and disadvantaged – and everyone else – are better off with the state controlling – or interfering in – most of our activities, or with the state not controlling them.

To illustrate my point, think about slavery. Surely some masters did some good things for their slaves. They gave them food, clothes, shelter, let them go to church on Sundays. But that’s hardly relevant. The question is whether the slaves would have been better off as free people.

*

The reason why most people don’t see through the illusion of the state is because they only see part of the picture. They view the role of the state in this way:

state => education, health care, pensions, roads, welfare etc. => citizens

But the real picture looks like this:

citizens => education, health care, pensions, roads, welfare etc. => state => citizens

What the state has done is to set itself up as intermediary, middleman, between citizens. Without the state citizens would deal directly with each other:

citizens => education, health care, pensions, roads, welfare, etc. => citizens

Just as they do in the “private” sector (i.e. in those areas in which the state does not interfere):

citizens => supermarkets, cars, holidays, religious services, charities, sports clubs, etc. => citizens

Now if the state were an ordinary middleman, one that we could either choose to deal with or not, that would not be so bad. But it is not. The state is an organization that works by force. It stands above citizens. It gives orders that we must follow. However benign the face of the state may appear to us, behind the face is an iron fist. When state actors intervene in our relations, we have to obey them. If we don’t we get thrown in jail.

So, whereas without the state people would have direct voluntary relations with each other, e.g. doctors with patients, teachers with pupils, employers with employees, with the state there is a third party involved, whose functionaries (civil servants, politicians) have the power to force the other parties to do their bidding.

For example, the state can decree that doctors are only allowed to prescribe certain drugs or perform certain treatments, or that students should take certain exams, or that employers should hire certain people, or that restaurants must serve certain types of food, or that food manufacturers must provide certain information to their customers, or that media must not publish certain viewpoints, or that employees must pay certain premiums for their pensions and be members of certain pension funds, or that companies must pay tariffs when they deal with foreign suppliers, and so on.

The private parties in all these relations cannot decide that they prefer different arrangements – they have to obey the orders they get from the state.

Many people assume that this power that the state has is a good thing, since it means there is one party that can ensure that the weak are protected, the disadvantaged are helped, and the public interest is served. And, yes, it is no doubt true that the state sometimes gives orders that may do some good. Some pharmaceutical drugs no doubt ought to be forbidden because they are dangerous. Students probably ought to learn certain things prescribed by state-controlled exams because that particular knowledge is useful to them. No doubt employees are protected against real dangers in the workplace sometimes thanks to government safety regulations.

Again, however, this is not a relevant argument. If you have an institution that has the power to compel people to act in certain ways, that institution can do good things with that power sometimes, just as slave owners surely had some rules that were useful for their slaves. And no doubt some slave owners were better (friendlier, less corrupt, less meddlesome) than others, just as some states are better than others.

The real question is, though, whether people are better off with an institution that has the power to control their relationships and actions than if there were no such institution. The real question is – would there be better, more and cheaper drugs if the state did not have the power to regulate the drugs market? Would we have better health care and education? Better social care, less poverty? Would students learn better, more and against lower costs? Would people have a higher standard of living and better life if they didn’t have to pay taxes and obey government rules? Would there be less inequality and more social harmony?

*

To find out what the impact is that the state has on our lives, we should look not only at the “positive” effects of its actions, but also at the negative effects. These negative effects – which ultimately all stem from the fact that the state is not an ordinary actor but has the power behind it to force people to obey its commands – are very real. What is more, they tend to be grossly underestimated by most people. This is because they are in many ways not directly visible. They can only be inferred by a process of reasoning.

I have made an overview of the negative effects of state action, dividing them into 10 broad categories, some of them obvious, many not so obvious at all. Together they add up to a pretty devastating picture – one that very few people actually grasp in its totality.

1. Waste

I will start with the simplest category. Everyone knows that government agencies tend to be inefficient.

They can afford to be inefficient, because a) they are not spending their own money, so they suffer no loss if they waste money, b) they have a monopoly so they don’t have to worry about competition and c) they can’t go bankrupt and have no personal liability.

Compare this to private ventures. These are also inefficient sometimes, but there are limits to their inefficiency. If they are too inefficient, they won’t survive. Besides, if they waste money, it is their own money and they themselves will pay the price, not the taxpayers.

The total amount of money and resources wasted by states can only be surmised. Rather than trying to come up with figures with lots of zeros, I will give some concrete examples of government boondoggles, out of the literally thousands I have come across in my life, and the millions I have not encountered, just to give you a flavor.

The British National Health Service (NHS) on one occasion managed to squander £10 billion on a failed IT system, described by the Guardian newspaper as “the biggest IT failure ever seen”. The point is not only that this happened, but that it did not have any consequences for the NHS. It did not go bankrupt. It simply went on wasting people’s money.

A parliamentary committee in the Netherlands found (this was back in 2014) that the Dutch state spends €4 to 5 billion every year on failed ICT projects. A study from the respected Technical University of Delft found that the Dutch government had wasted €100 billion on infrastructure fiascos in the period 1980-2012.

The Washington Post once reported (in 2016) that an internal report of the Pentagon showed they could save $125 billion in five years just by being more careful with their money. That’s the Pentagon talking about the Pentagon.

Greece, that poor victim of “capitalism”, received €682 million in EU funds when it joined the European Union in 1981. From 1982 on, it received 6.8 billion ECU (the predecessor of the euro) in agricultural support every year. Between 1989 and 1993 it received an additional 7.2 billion ECU. The Greek government had no problem finding outlets for this money. From 1952 to 2001 the number of civil servants in Greece grew from 73,000 to 768,000 (and more than 1 million if subsidized institutions are included, 10% of the population). In 2009, 55% of the state budget went to salaries and pensions of civil servants. Meanwhile, it was virtually impossible to set up a business in Greece because of bureaucratic barriers.[1]

Italy: same story. Roberto Perotti, an economics professor who worked temporarily as advisor for the Italian government, tells about his experiences in an interview: “There were programs going on for 40 years which nobody ever looked at. I came across one of €150 million which did not serve any purpose, but the director was very much attached to it. Public managers working for the government earn incredibly high salaries, often more than €200,000 per year. Italy gets €10 billion in EU funds. Nobody knows how that money is spent. I once tried to make a survey of the money going to startups in the region of Lazio. There were 13 programs being carried out, all paid by the EU. Bureaucracy is a huge problem but nobody does anything about it.”[2]

Italy at this moment pays €78 billion a year in interest to service its national debt. [3] Other countries also pay large amounts. In the Netherlands, a relatively fiscally conservative country, the amount was €37 billion in 2020, the fourth largest item in the national budget. Progressive commentators complain endlessly about any little budget cut, but they never talk about the crazy amounts of money that are needlessly spent as a result of government overspending in the past.

Multiply these examples by millions of others and you get an idea of how much money goes down the drain as a result of bureaucratic inefficiency. Yet no government agency ever went bankrupt and no bureaucratic manager was ever hounded by creditors because of his or her mismanagement.

When you don’t pay your taxes you are thrown in jail. When you waste taxes you can do what you want.

2. Fraud

There is often only a thin line between waste and fraud. The way state agencies manage their finances, spending money that is not their own, creates a constant temptation for irresponsible behavior.

Fraud is not just committed by government officials but also by private companies dealing with the government. In this case it is what you might call a combined effort – but it is made possible by the power the government has to spend taxpayer money on monopolized functions.

One obvious example are military contractors in the U.S. who not only waste hundreds of billions of dollars but also defraud the public of hundreds of billions. Again, a random example – according to a Department of Defense report to Congress, as reported by the Federation of American scientists, “during the five year period from 2013-2017, there were 1,059 criminal cases of defense contracting fraud resulting in the conviction of 1,087 defendants, including 409 businesses … There were another 443 fraud-related civil cases resulting in judgments against 546 defendants. During that same period, the Department of Defense entered into more than 15 million contracts with contractors who had been indicted, fined, and/or convicted of fraud, or who reached settlement agreements.” The value of those contracts exceeded $334 billion, according to the DoD report.

These are just cases unearthed by the Department of Defense itself. We can only speculate about the cases that are never discovered.

The story is the same in Europe. According to a news item on a European website in 2016, “The EU has disbursed billions of euros to Ukraine, largely for budget support, but the European Court of Auditors (ECA) admitted yesterday (6 December) it was unable to say how the money was spent. Speaking to the press hours ahead of the publication of the ECA report on EU assistance to Ukraine, Szabolcs Fazakas, who led the audit, admitted that the EU had no chance to analyse the spending.”[4]

Once more, this is a random example. The European Court of Auditors has been issuing reports for decades showing that no one knows how most of EU funds are spent, but nothing is ever done about it. The European Parliament moves from Brussels to Strasbourg every month, for no good reason whatsoever, which leads to unnecessary costs of some €114 million per year (not to mention additional CO2 emissions!), year after year after year, yet these parliamentarians couldn’t care less, as they are not the ones who have to pay the bill.

A 2013 report from Accenture which I stumbled on notes: “There is a financial leakage in social welfare systems all over the world. These cracks in the system, if left unaddressed, will continue to widen and negatively impact government—and society—as a whole. These leakages manifest themselves in a variety of ways, with fraud, waste and abuse at one end of the spectrum, to overpayment and errors occurring as part of day-to-day processing. Each of these issues puts a hefty financial burden on the government system. For example, in the United Kingdom, the National Fraud Authority estimates that £21 billion ($33B USD) is lost to fraud in the public sector each year. Overpayments in Ireland increased by 65 percent in just three years. And in the United States, improper payments by government agencies reached $125 billion in FY10.”

This is just “direct” government fraud. Indirect fraud, in government-related sectors, is much higher. Take health care. According to the Accenture report, “Estimates by government and law enforcement agencies such as the FBI place the loss due to healthcare fraud as high as 10 percent of annual healthcare expenditure (around $226 billion).” In case you are wondering: the $226 billion is 10% of total healthcare expenditure, which at the time was more than $2 trillion and by now (in 2018) has reached $3.5 trillion, of which $1.5 trillion is spent by the federal government. (So much for the idea that the U.S. has a privatized healthcare system.)

Aid to developing countries is also a notorious source of waste and fraud. An example: Honduras is one of the largest recipients of aid from the EU. According to a report from the European Court of Auditors (ECA), the country received €223 million in the period 2007-2013, and that amount was to be raised to €235 million in 2014-2020. According to the ECA, this money goes largely for “budget support”, which is to say that the Honduran government can spend it in whatever way it likes. The ECA notes that “there are considerable risks to this kind of support”, such as “fraud and corruption”. The EU “does not have the expertise to monitor the spending on location.”

Despite all this financial support, poverty in Honduras grew in the period 2007-2015, notes the report. Interestingly, the EU was only the fourth largest (!) of the twelve largest donors to the country, meaning that Honduras, a country with a population of less than 10 million, receives hundreds of millions annually in development aid on a continual basis, yet its people are fleeing the country to escape from poverty and repression. The ECA notes that “there is little coordination between the donors”, there are many cases of “double funding, corruption and lack of consultation between donors.”

Everyone knows that these practices occur all over the world, we read about them regularly. Yet progressive intellectuals prefer to blame Nike and Shell for the poverty in the world. If they really care about people, why aren’t they writing books and waging campaigns against states and the foreign aid mafia?

3. Corruption

Corruption occurs when state functionaries are paid by private citizens who want to get some favor done, or – far more frequently – when private citizens are forced to pay to obtain permission to do something.

This is a more insidious practice than simple fraud. Corruption kills economic growth. It puts the worst kind of people in charge of the economy and makes it impossible for the best people to undertake productive activities. Corruption is probably the single most important factor causing poverty and stagnation in many countries in the world – although you will never hear the likes of Thomas Piketty say so.

In December 2018, the European Commission reported that “this year’s Corruption Perceptions Index [drawn up by Transparency International] highlights that the majority of countries are making little or no progress in ending corruption, while further analysis shows journalists and activists in corrupt countries risking their lives every day in an effort to speak out. The index, which ranks 180 countries and territories by their perceived levels of public sector corruption according to experts and businesspeople, uses a scale of 0 to 100, where 0 is highly corrupt and 100 is very clean. This year, the index found that more than two-thirds of countries score below 50, with an average score of 43. Unfortunately, compared to recent years, this poor performance is nothing new.”

Corruption is particularly pervasive and killing in developing countries. One research report, called The plunder route to Panama, noted that African presidents of countries like Togo, Burundi, Mozambique, South Africa, Botswana and Rwanda have siphoned off billions of euros from their own country. For example, from the Democratic Republic of Congo, every year some $15 billion is secretly taken out of the country by its leaders, notes the report. This, according to the CIA Factbook, is “a nation endowed with vast natural resource wealth”. It is also in some rankings the poorest country in the world.

Again, how long will we keep blaming “capitalism” for the misery in the world and close our eyes to the state thieves that are strangling our societies?

4. Self-enrichment

Since they don’t have to persuade customers to pay for their services, state agencies are in a position to award themselves generous budgets for their activities. Needless to say, they make ample use of this opportunity.

One particularly infuriating form of self-enrichment is the money politicians and civil servants spend on their own salaries. For example, the 751 members of the European Parliament get a salary of €8484 per month (figures are for 2018) plus €4342 per month for general expenditures, plus business class flights and first-class train tickets, a general travel allowance of €4264 per year, plus an additional allowance of €306 per day for every day they are present at official meetings[5], plus compensation for two-thirds of their medical expenditures, plus a pension from age 63 that can be as much as 70% of their salary.[6]

Who wouldn’t want to be a representative of the people under those terms? As a self-employed citizen of the EU nobody voluntarily offers to pay me this kind of money. Nor, I am sure, would anyone ever voluntarily pay those people in that Parliament these sums. Yet they are able to give themselves these salaries, because they are able to force me and others to pay for them. This is legalized theft.

I am singling out the EU, but you can rest assured that other politicians and civil servants in Europe and all over the world aren’t doing too badly either. It’s no coincidence that civil servants everywhere tend to have strong job protection and inflation-proof pension schemes and are usually able to retire at an early age.

France, to mention that country again, has 5.5 million civil servants, who can retire at 62, often work less than 35 hours per week on full pay, have 42 days off per year (compared to 29 in the private sector) and have the best pension schemes in the land. Whenever there is the slightest suggestion from the government in Paris to cut back ever so little on these lucrative schemes, the selfless civil servants, who are always whining about the evil selfish capitalists, immediately take to the streets and scream in protest. France also has the highest taxes in the industrialized world, and persistently high unemployment, but it seems the taxpayers and the unemployed accept it because they all hope to become civil servants one day.

In the U.S. federal employees make more money on average than employees in the private sector. Whether they would make the same money if they had to offer their services in the market place, where people could decide voluntarily if they wanted to buy them or not, I leave for you to imagine. The three richest counties in the U.S., by the way, are all in Washington DC.

In contrast to the politicians and bureaucratic managers, the “field workers” of the state, such as teachers, nurses and police officers, are a lot worse off. This is because they represent a cost to their employer, the state. Although most of them don’t realize it, they might make a lot more money if their sectors were privatized.

5. Favoritism

Many people realize, at least to some extent, that the state tends to be wasteful, and fraudulent and corrupt sometimes. But they tend to be forgiving of such practices, because they believe that, when all is said and done, state intervention takes from the rich and gives to the poor. If that were only true.

In reality, the state takes from us all, especially the poor. In fact, it’s pretty naïve to think that the rich and well-educated will be the losers in the state’s redistribution game. They are after all much better able to organize themselves than the poor – to discover loopholes in legislation and influence legislation in their favor.

The way in which the well-connected profit from state favors goes far beyond crude redistribution schemes. The most important method they use is by bending the rules in their favor.

The state, with the power that it has, offers numerous ways of doing so. To mention a few:

  • subsidies
  • lucrative government contracts
  • occupational and other licensing laws
  • consumer protection laws
  • environmental protection laws
  • zoning restrictions
  • favorable corporate legislation
  • intellectual property rights
  • foreign aid schemes (to favor “allied” foreign states as well as domestic exporting companies and financial institutions)
  • bailouts (of banks, corporations, foreign states)
  • tariffs
  • price interventions
  • resource monopolies
  • interest rate manipulation
  • cheap credits and loan guarantees
  • money creation

In their 2017 book “The Captured Economy – How the Powerful Enrich Themselves, Slow Down Growth and Increase Inequality”, economists Brink Lindsey and Steven M. Teles give many examples of how this kind of political pull benefits some at the expense of others.

“High trade barriers and price supports for farm products disproportionately benefit large agribusiness”, they note. “The Jones Act outlaws competition from foreign shipping companies in US waters while similar cabotage restrictions block foreign air carriers from US routes. Ethanol subsidies and the Export-Import Bank are just two of the more egregious examples of corporate welfare business subsidies larding up the federal budget. Government contractors enrich themselves at public expense with cushy cost-plus contracts. Regressive regulation at the state level shields businesses as diverse as auto dealers, funeral directors and hospitals from competition.” The list goes on and on.

Bailouts of financial institutions are another notorious example. The bailout of the state-privileged savings and loan banks in the U.S. in the 1980s cost taxpayers $124 billion, write Lindsey and Teles. “Continental Illinois in 1984, the Latin American debt crisis of the 1980s, the peso crisis of 1994, the Asian financial crisis of 1997-98, Long Term Capital Management in 1998, and of course the financial crisis of 2007-2009 – again and again the US government has intervened with emergency assistance to prop up American financial institutions …” Note that the people who mismanaged these institutions and drove them to bankruptcy were able to continue their high-class lifestyles thanks to taxpayers.

Yet another form of government-granted privilege which drives up costs for the rest of society is occupational licensing. In the U.S. 30% of workers are subject to it, according to Lindsey and Teles: “Health, education and law are heavily licensed. In at least 30 states licensed occupations include cosmetologists, manicurists, barbers, massage therapists, etc. Cosmetologists must complete on average 372 days of education and training. But empirical studies find little or no connection between occupational licensing and better service for consumers.” This even goes for teachers, dentists, florists and so on. The direct cost to consumers amounts “to some $203 billion a year”.

The authors observe that “licensing widens the gap between rich and poor by restricting job opportunities for lower educated people (and inflating the compensation of higher educated ones). The toll in lost jobs as a result of licensing is 2.85 million jobs. 43% of licensed occupations require a college degree, but only 32% of Americans have one. Even as employment opportunities dwindle as a result of globalization and automation, the poor are hurt harder.”

6. Bureaucracy and regulation

It is in the interest of bureaucrats of course to maximize bureaucracy as this gives them work and power. But bureaucracy is also inherent in how the state functions. State functionaries control education, health care and many other sectors, but they are not themselves educators, medical experts, policemen, and so on. Nor do they have a direct stake in the private transactions they oversee. So how are they to do their job? There is only one way they can do it: with bureaucratic edicts. Rules and regulations.

Sectors directly controlled or regulated by government are usually the worst off. They tend to be strangled by stifling bureaucracy. Ask any doctor, teacher, or police officer. One article in a Dutch newspaper from 2018 quoted a police detective who said she sometimes spent an entire day at the copying machine to comply with the bureaucracy in the police department. Meanwhile, the Dutch police fall far short of their self-imposed “target” of solving 10% (!) of the burglaries taking place. Many towns score 0%.[7]

The cost bureaucracy imposes on society can only be guessed at. One government institution in the Netherlands, set up to investigate the burdens of regulation, studied just five sets of regulations and concluded that they lead to additional costs of €500 million per year for Dutch citizens.[8] An old clipping from a Dutch financial newspaper mentioned that “rules and regulations costs business €51 billion in 2003” in the Netherlands (i.e. in just one year).

The cost of home builders in the U.S. to comply with regulations was on average $84,671 for a new single-family home in 2016, according to figures from the National Association of Home Builders, 30% higher than five years before. [9]

The annual Ten Thousand Commandments report from the Competitive Enterprise Institute estimated that federal regulation in the U.S. (only federal) imposed a hidden tax of nearly $15,000 per household in 2017 alone.

A study from the Mercator Center of George Mason University concluded that regulation cost businesses in the U.S. $4,000 billion in the period 1980-2012. According to this study, the U.S. economy would be 25% bigger without this regulation!

A study in the June 2013 issue of the Journal of Economic Growth by John Dawson of Appalachian State University and John Seater of North Carolina State University came to the conclusion that federal regulations reduced economic growth by 2% per year between 1949 and 2005. That may not seem like much, but what this means is that “annual output by 2005 is about 28 percent of what it would have been had regulation remained at its 1949 level.”

As Lee Friday wrote on the website of Mises.org, taking these figures forward to 2011, “nominal GDP in 2011 would have been $53.9 trillion instead of $15.1 trillion”. This “annual loss of $38.8 trillion converts to about $277,100 per household and $129,300 per person.” [10]

Yes, these are incredible numbers. Think about them next time when you hear someone complaining that “capitalism” is causing poverty or when you hear people demanding a universal basic income.

Note that none of these costs appear in state budgets or spending figures or in tax rates. They are hidden costs, extra burdens on citizens that do not appear in any financial account.

7. Opportunity costs

People who complain about high taxes tend to say things like “We have to work for the state until the end of May, and then we can start earning money for ourselves.”

If that were only true! The reality is far worse. Such statements not only ignore the indirect costs of state interference, some of which we have discussed above, and which are far greater than the direct costs, they also ignore the opportunity costs involved.

As one Greek commentator observed about the financial support received by Greece from the EU and elsewhere: “The transfers from the EU and the borrowed money went directly to finance consumption, not to saving, investment, infrastructure, modernization, or institutional development.”

This is a very important point. Whenever government takes money from us and wastes or misspends it, or drives up costs through regulations, this money does not go to saving, investment, business, private activities. We will never know how much wealth would have been created if that money had come into private hands.

Bureaucracy has a similar hidden cost. It not only imposes direct compliance cost on businesses and organizations, it also means that the people who have to do the complying, for instance spend days filling in useless forms, can spend so much less time on productive activities. We will never know how much or what they would have produced if they had not had to waste their time as a result of state directives. 

Just think of all the highly paid, highly educated, certified accountants and tax advisors who spend their entire working life helping their clients avoid taxes, which is no doubt a useful service to these clients, but if the taxes had not been there in the first place (or had been simpler), they could have spent their lives doing things that would have offered real added value to people’s lives.[11]

Yet the financial side is only part of the story. Government control of sectors such as education, health care, and others, carries another opportunity cost: it takes a toll in missed innovation.

Take education. Since the government prescribes what students have to learn, and to a large extent how they must learn, and how schools are financed, it’s difficult to get new educational initiatives off the ground. In my country the high school system is churning out growing numbers of children who can’t spell or write properly and can’t calculate or do basic math. U.S. high schools may even be worse.

The question is, what would the educational system look like if the government did not interfere with it? We will never know – but I am convinced it would look very different and be much better. And if that is true, think about the effect that would have on society and the economy. But again, it’s an effect that can’t be seen or measured.

Innovation is hampered in other sectors as well. Take U.S. spending on the military. As economist Seymour Melman pointed out, all the resources spent on useless military services cannot be spent on more useful purposes: “Our able young men cannot, at once, be trainees for the Atomic Energy Commission and physicians in training; they cannot be teaching the young and also designing missile components.” Beyond a certain level, military spending becomes wasteful, noted Melman. “Whatever else you can do with a nuclear-powered submarine that is almost as long as two football fields, and capable of cruising underwater for weeks and at high speeds—you can’t wear it, you can’t live in it, you can’t travel in it, and there’s nothing you can produce with it”.

But again, we will never see all the things that were not produced and the services that were not delivered and the innovations that were not made because of the resources that went into the production of nuclear submarines and other military goods.

What goes for military spending, goes for other types of government spending as well of course. In Europe almost all R&D spending goes through government and EU channels. This makes it difficult for politically unconnected companies to obtain money to finance new research.

8. Multiplier effects

All the wasted opportunities and wasted resources not only represent direct and indirect losses to society, but there also multiplier effects to consider. The businesses that would have been started up, the innovations that would have taken place, would have led to other initiatives and other innovations.

Suppose part of the trillions spent on the U.S. military would have been spent on the development of new life-saving drugs, and suppose these new drugs would have saved a lot of people’s lives. Then the people whose lives had been saved could have made other valuable contributions to our economy and society.

Again, the costs of government interference – indirect cost, opportunity costs and their multiplier effects – are literally unimaginable, because they cannot be seen and will never be observed in real life. Yet they are real.

State interference works like prevention, but in reverse. If by taking precautions you prevent a disaster from happening, you will never know, because the disaster didn’t happen. Yet the positive effect is real. The state’s “prevention” of private activities has the same result, it’s just as real, only it doesn’t prevent disasters, but value creation.

As the great French economist Frédéric Bastiat already observed back in the 19th Century (yes, the French do have some excellent economists, even if they don’t know it): “The enormity of the costs of the state can only be discovered in considering its unseen costs: the inventions not brought to market, the businesses not opened, the people whose lives were cut short so that they could not enjoy their full potential, the wealth not used for productive purposes but rather taxed away, the capital accumulation through savings not undertaken because the currency was destroyed and the interest rate held near zero, among an infinitely expandable list of unknowns.”

By the way, we do sometimes get a glimpse of the unseen costs of the state, namely when the government happens to withdraw from some sector, or privatizes activities (which it does sometimes, usually as a result of pressure from citizens or voters). Think about television broadcasting (in Europe) or air travel or the telecoms sector. These sectors all grew explosively when they were liberalized. Yet when they were controlled by the state, no one was able to imagine the potential that they had.

9. Parasitism

We still have not exhausted the negative effects of government power. Government intervention also leads to dependence and parasitism among citizens.

When government programs are in place, people have an obvious incentive to make use of them. At the same time, government functionaries also have an incentive to maximize the number of people who use them. They certainly don’t have an incentive to get people off welfare or subsidies. I once read a newspaper article about a city councilor in Amsterdam who went around neighborhoods to make people aware of all the support schemes the city had to offer them and which they weren’t using, to his regret.

It’s not just the poor who will lose their self-reliance as a result of the state’s power. I remember I was present once when a group of people got together to set up a “skeptical society” to investigate the claims of psychics, astrologists and the like. The first item on the agenda of that first meeting: can we apply for a subsidy? It is just a very small example, but it shows the way people will start to think when the state stands ready to “support” all kinds of activities.

Observe that this group of highly educated and well-off people had no problem making other people pay for their own hobby. Isn’t that remarkable? They probably felt that since everybody was doing it, there was no reason why they shouldn’t do it too.

And they had a point. This is what will inevitably happen with the state able to control people’s resources: interest groups will be formed and lobby groups will emerge who will all try to get their hands on money disbursed by the state. Artists, football clubs, schools, media, journalists, academics, lawyers, transgenders, stamp collectors, environmental activists, doctors, patients, researchers, businesses – they will all get in on the act and try to obtain money from the state, because they know there is money to be had, and because they know if they don’t do it, others will.

The result is a society in which people, rather than trading value for value with each other, and becoming wealthier together, will become each other’s adversaries and will try to steal from each other by means of the state.

As Frédéric Bastiat wrote: the state is “that great fictional entity by which everyone seeks to live at the expense of everyone else.”[12]

10. Inflation

One more perverse effect of government intervention that deserves separate mention is inflation. Modern states have a unique instrument at their disposal which makes it possible for them to spend money virtually unchecked: they have the power to “print” money, to create money out of nothing.

Think of that. If they want to get money, they don’t need to tax people. They can just create the money. Which means they can obtain any resources they like without having to supply anything in return. Some position to be in.[13]

Indeed, it is the official policy of our central banks to “inflate” the money supply. This constantly erodes the value of our money and thereby leads to constantly rising prices. They say that this is “good for the economy” because it stimulates “demand”. The current president of the European Central Bank, Mario Draghi, has repeatedly said inflation in the EU “is not high enough” (!) and has repeatedly announced he will take measures (i.e. create more money) to increase it. This is downright criminal. It’s outright theft: the ECB is deliberately reducing the value of people’s savings in this way.

You’d think it wouldn’t take a genius to understand that creating more money is not “good for the economy”. Would you rather live in a society where prices would keep falling or in a society where prices keep rising? As libertarian author Lew Rockwell once wrote: if Wal-Mart’s slogan is “always lower prices”, the slogan of the Fed and government should be “always higher prices”.

People nowadays regard permanent inflation as normal but it’s not. It’s the direct result of government and central bank monetary policy. If our central banks did not expand the money supply, prices would on average tend to go down. This is something that any sane person regards as positive, except our economists and politicians who claim that the economy will collapse if there is “deflation”. This is demonstrably false, since there are plenty of examples of competitive economic sectors where prices do go down (thanks to the free market) and these sectors show no signs of collapsing.[14]

The real reason why the central banks create money all the time is that in this way they and their beneficiaries – governments, banks, financial institutions – are provided with a constant, endless stream of resources for free.

For the rest of the people, though, inflation is a permanent added tax which keeps them in a rat race. Imagine what the result would be if government did not inflate the money supply and prices would go down on average, year after year. People wouldn’t have to be worried anymore about their pensions! Their savings would become worth more.

What makes inflation particularly evil is that those who are hit hardest by it are the people at the bottom of the pile. Pensioners, people who have no inflation-proof salaries, who are dependent on social security or unemployment benefits or work for minimum wages, people who don’t own houses (since house prices keep going up as a result of the constant growth of the money supply and the artificially low interest rates set by the central banks). These people keep finding themselves further and further behind.

*

The state, then, even though it ostensibly does good things, actually makes all of us (except for a few direct beneficiaries) worse off. Its interventions drag down the entire economy.

The effects of state intervention, however, as we have seen, remain mostly invisible. We can only see what exists, not what doesn’t exist. What we see is a state apparatus that is rather inefficient (most people can see that) but at the same time “takes care of the poor and disadvantaged”. We don’t see the price everyone – including the poor and disadvantaged – pay for the state’s far-reaching control of our economy and society.

We don’t see that all of us, and certainly the poor and disadvantaged, would be much better off if the state were not there. We would have a much higher standard of living, higher economic growth, more jobs, more opportunities for everyone.

Let me try to illustrate my point with a thought experiment. Think of our supermarkets. Today, supermarkets are mostly left to “the free market”, i.e. the voluntary exchanges between people. The state does not control the supermarkets. The result? A very efficient system in which rich and poor, old and young, have an enormous amount of choice, can buy any kind of food – expensive, organic, cheap, with or without preservatives, gourmet, hot, cold, fresh, etc. – at virtually any time of day, just by going to a store of their choice. There are no waiting lists, no requirements, no forms to fill in. Most of the time the staff in the store treat you like a king, they are there to serve you, and if they don’t do what you expect them to do, you go to another store next time, and the hell with them. You never think twice about the possibility that you may not be able to buy whatever food you like whenever you want it.

Now think what would happen if the state started controlling supermarkets in the way it controls for example health care. The retailers would suddenly have to deal with bureaucrats and politicians before they could think about their customers. The bureaucrats would impose requirements on them. They would tell them what sort of products they could sell, at what price. They would ask them to report on everything going on in their stores. Customers couldn’t just go in and buy stuff, they would be required to get insurance and they could only buy whatever was covered by their insurance. The customers would of course try to get as much as food as possible for their insurance, but the supermarkets could not increase the supply of the products most in demand, since that would cost too much money, so they would have to start rationing those products, and they would put you on a waiting list. And so on.

You can see where this would end up. And not because the supermarket personnel would be bad people. They would be the same people trying to deliver the best service they could. But they would be hampered in every move by the bureaucrats and the rules being imposed on them.

Now here is another point: suppose our supermarkets were organized like our health care system and someone – for instance, someone like me – would come around and say – we should get rid of state interference altogether, then we would have a much better supermarket system. What would happen? Everyone would protest! Why, getting rid of state control? Food is a necessity of life! How could we ensure that everyone would get adequate food? The poor would not get the same quality as the rich! Some supermarkets might deliver unsafe products! They would try to make a profit! On food! It does not bear thinking about: how can you want to leave something as essential as food to profit-seeking businessmen?

No, no, people would say, to fix the system, we need to reform it. We need to put more tax money into it, more government control, more rules, different rules, different politicians, more competent bureaucrats, higher wages. They would come up with any kind of solution except the one that would really work: getting rid of the state altogether.

This is the situation we are in today in our societies. We try to fix our economies in every way except the one way that would really work: abolishing the state.

*

But, you might say, even if the state’s interventions in the economy have all sorts of bad effects, don’t we need the state to at least provide a “safety net” for the poor and to ensure some degree of “equality of opportunity” in a broad sense of the term?

Inequality, I agree, is a problem, if it means that some people become poorer or are unable to increase their wealth. This may well be a growing problem today. But what are the causes?

The standard narrative is that there is a growing group of people being “left behind” or having to work in low-paying irregular jobs, because governments, spurred on by free-market ideology, have cut back on welfare spending, loosened job protection rules for workers, privatized and liberalized economic sectors, and failed to support national industries against foreign competition.

However, a few things are missing from this tale.

Firstly, it is the state that is destroying jobs by imposing crushing costs on business. Why is it so difficult for lower educated people to get a “fixed” job? Because entrepreneurs are evil people who want to “exploit” the workers? Then why do they hire staff in the first place? They are not forced by anyone to hire people. They do so because it is in their interest. They are willing to pay for labor, but the problem for them is that the state has made labor so expensive, with crushing payroll taxes and all sorts of other “protective” regulations, that they simply can’t afford to hire many people. They can afford even less to offer them permanent jobs, because once they have hired people on a permanent basis, they can’t easily fire them if they have to.

This is not to mention all the other requirements put on employers by the state. In the U.S. if you happen find yourself on the wrong side of all the labor legislation that exists, you can get sued for millions. In a country like France when you want to fire people or close down a company, you may be threatened or even taken hostage.[15]

Secondly, and even more importantly, it’s not the free market that is causing the cost of living to go up all the time. It is the state that does this, with its taxes, its inflationary monetary policies and the bureaucratic barriers it puts in the way of private entrepreneurs. It is the state that puts VAT on products and services, in my country 21%, even 9% on food. It is the state that is eroding the value of people’s savings and pensions by constantly printing new money. It is the state that is driving up housing prices in the same way.

It is something mainstream economists never talk about, but the permanent inflation caused by the state’s monetary policies is probably the main reason for the rising inequality in our society. Central banks directly and indirectly put billions into the hands of a small group of beneficiaries – banks, government institutions, multinational companies, institutional investors and financial speculators. These in turn drive up prices for everyone, especially assets such as real estate and stocks.

As economist Louis Rouanet observes: “Under modern central banking … money is created and injected into the economy through the credit channel and first affects financial markets. Under this system, commercial banks and other financial institutions are not only the first receivers of the newly created money but are also the main producers of credit money…. Thus …. financial institutions benefit disproportionately from money creation, since they can purchase more goods, services, and assets for still relatively low prices. This conclusion is backed by numerous empirical illustrations.”

Rouanet notes that “asset price inflation resulting from the growth of financial markets will benefit the workers, managers, traders, etcetera, working in the financial sector. It will also benefit the CEO’s of the publicly traded companies who will be paid more as the capitalization value of their company increases. Hence, the correlation between asset prices and income inequality has been, as expected, very strong.”[16]

But the part that the state plays in income inequality is somehow never mentioned by the critics of “capitalism” like Thomas Piketty – or Karl Marx, for that matter.[17]

The whole idea that government is somehow “stepping back” and leaving us to the vagaries of the free market is simply a lie. Yes, governments may now and then have to cut back on certain programs when costs really get out of control. But overall government spending and government intervention have certainly not decreased. Bureaucracy keeps getting worse. State budgets keep going up, government debts keep growing, levies, duties, taxes, tariffs, excises keep rising – even as governments keep on creating more and more money.

The real and growing inequality that exists in our society – and which you never hear about – is not between the “rich” and the “poor”, but between the well-connected and the unconnected, between those who profit from the state and those who pay the bill.

In our state-controlled societies, there are relative winners, people who benefit from the state (although they too might be better off if there were no state to begin with): corporations that profit from protective tariffs, patents and other privileges, established professions that benefit from occupational licenses and other legal measures which keep out newcomers and drive up costs, banks and financial institutions that profit from cheap money and bailouts, business sectors (agribusiness, military-industrial complex) that benefit from subsidies and government contracts, the entire cultural sector which is steeped in subsidies, and the state functionaries themselves who never have to worry about where their next paycheck will come from.

But for every beneficiary there is someone who has to pay, for everyone who is better off because of these government privileges there is someone who is worse off. This is ignored by everyone, especially by the people who complain the loudest about inequality, such as media pundits and progressive intellectuals, but also scream the loudest when their own subsidies and perks threaten to be cut.

*

However, doesn’t history prove that if there is no state, there will be an underclass of people condemned to a miserable life?

People often point to the deplorable living conditions in the 19th Century, supposedly the heyday of unbridled capitalism, or to the many beggars and homeless people in the streets of the U.S., supposedly the most “capitalistic” country on earth, as evidence that we need the state to ensure that no one “gets left behind”.

But both these examples are misleading. The 19th Century was a period of rapid economic growth in America and Europe, with unprecedented population growth, in which millions of people for the first time were able to escape from the grinding poverty that had been the fate of the masses since time immemorial. Yes, working and living conditions were horrible by modern standards, but they had always been like that.

The fact that the great mass of people was poor was normal. The abnormality rather lay in the fact that they were in the process of becoming wealthier. The Industrial Revolution for the first time in history enabled masses of poor people to escape from poverty.

This does not justify all the inequality and injustice that existed in the 19th Century, but the wrongs that existed in those days can’t simply be blamed on “capitalism”, not if that means “the free market”. The state had dominated the economy for centuries. The classical liberalism of the 18th Century was a revolt against the prevailing and pervasive mercantilist state control of the economy, but the state hardly melted away in the 19th Century. Liberalism and individualism did make inroads into the old power structures, which did lead to unprecedented economic growth, but the old structures were not simply swept away.

In fact, in the latter part of the 19th Century, the state became more powerful again. This was the age of colonialism and imperialism, as well as rising nationalism and socialism, all of which were inspired by collectivist thinking and encouraged or led by states and their rulers. The prominent classical liberal thinkers in those days opposed colonialism, imperialism and war, but they were shoved aside. The “Progressives”, the Bismarckians, the Romantics, the Nationalists, the Fascists, the Socialists, were all clamoring for more powerful states. This period ended with the killing fields of the First World War, which was not caused by “capitalism”, but by the rise in populist-nationalist thinking that had taken hold in Europe in the decades preceding it.

As to the poverty and inequality in the United States, it is true that the U.S. does not have the same level of welfare spending that European countries have, but that does not mean that poverty in that country is caused by the lack of welfare spending.

Whatever you can say about the United States, a country with a public debt of $22,000 billion (as I am writing this), an annual government budget of $4,000 billion, a central bank that controls the monetary system, hundreds of thousands of laws and regulations, more people in jail than any other country, by far the highest military budget in the world, whose federal government is, with 2.7 million civilian employees, the largest single employer in the country, whose state and local governments employ another 20 million people and the armed forces another 1.35 million uniformed personnel, is not a “free-market” country, let alone a “night watchman” state, as many people seem to think.

The U.S. has one of the most powerful and intrusive governments that has ever existed. But rather than being run by socialist types, it is mostly run by well-connected businessmen and academics at the expense of the rest of the population. It may spend less on social welfare than European countries, it spends vast sums on “corporate welfare” – as well as on “warfare”.

For example, U.S. military expenditures, as everyone knows, tower far above military expenditures of European and all other nations in the world. By my own rough calculations, based on public sources, I calculate that military spending in the U.S. in the period 1946-2018 amounts to over $27,000 billion.

If the U.S. had just spent 10% of that money on the military (roughly the same as Russia has done), it would have been perfectly capable of defending itself and every man, woman and child in the U.S. who lived during that period would have been roughly $50,000 richer, without even counting interest. And then we are only talking about defense spending, which is around 15% of the federal budget. Multiply the $50,000 by 6.6 and you get an idea of what the U.S. may have looked like with a much smaller government.

*

To argue that we need power, the state, to combat poverty and inequality is to miss the point that power is the most important cause of poverty and inequality. The poor may get some direct benefits from the state – but the reason most of them are poor in the first place is precisely because of the power the state has.

The problem for most poor people in the world today is not that they couldn’t take care of themselves if they got the chance, or that they need the state to do so. The problem is that they are unable to take care of themselves, because the state stands in their way.

They are kept from saving and investing, setting up new enterprises, finding jobs, raising their income because the state and its associated power elites control natural resources, set up bureaucratic roadblocks, impose taxes, issue directives, inflate the money supply. They are kept poor by the power structures in society that privilege the rulers and their followers.

In 1964, in an article entitled “The New Property”, Yale law professor Charles Reich wrote approvingly: “One of the most important developments in the United States has been the emergence of government as a major source of wealth. Government is a gigantic syphon. It draws in revenue and power, and pours forth wealth: money, benefits, services, contracts, franchises, and licenses. Government has always had this function. But while in early times it was minor, today’s distribution of largess is on a vast, imperial scale. The valuables dispensed by government take many forms, but they all share one characteristic. They are steadily taking the place of traditional forms of wealth – forms which are held as private property. Social insurance substitutes for savings; a government contract replaces a businessman’s customers and goodwill. The wealth of more and more Americans depends upon a relationship to government.”

Reich was ecstatic about this state of affairs. Even though he was a professor at Harvard, he apparently could not understand that a syphon is not a source of wealth. The government “pours forth wealth”, well, yes, wealth that was first produced by people and taken from them. (Remember the graphic I showed you above?) And despite, or maybe because of his Harvard education, he couldn’t conceive of the costs, let alone the hidden costs – not only in financial but also in social terms – of this gigantic shift from a free country to a collectivist country.

Reich probably dreamed that this massive state interference would redistribute income from “the rich” to “the poor”. The “anarchist” thinker Gary Chartier knows better than that. In his book, The Conscience of an Anarchist (2011), Chartier observes: “Once a state is in place, people with wealth and power can influence it, and achieve their goals, far more efficiently than if they had to reach their objectives by convincing or manipulating individual people or small groups to go along with them. Seducing or partnering with a single politician or bureaucrat can yield an enormous payoff for a wealthy person or group. The existence of the state, and its unavoidable susceptibility to manipulation, dramatically magnifies the power of people with wealth.”

Chartier wants to have none of this. “I’m an anarchist”, he writes, “because I believe that the state tends to consolidate the power of the wealthy and to help them exploit others. It fosters poverty by securing privileges for the wealthy and well connected. It promotes hierarchical models of business organization and the centralization of power in the workplace. It creates and encourages the persistence of monopolies and other cartels that increase the power of privileged elites at the expense of everyone else. And it sanctions and perpetuates the violence that has been and continues to be used to dispossess poor, working class, and middle class people in favor of large landowners and wealthy business leaders.”

It’s a perspective that few seem to understand anymore, but which we need to regain if we are serious about making the world a good place for every peaceful human being.

[1] Bastiaan Bommeljé, NRC Handelsblad, 25 April 2015

[2] Marc Leijendekker, NRC Handelsblad, 15-11-2016

[3] Ronald Stoeferle, Rahim Taghizadegan, Gregor Hochreiter, The Zero Interest Trap, published by Mises.at, 2019

[4] Euractiv, 7 December 2016

[5] A Dutch television documentary in 2013 showed that some MEPs simply check in and then out again so that they can cash their “attendance fee”

[6] Source: https://www.europa-nu.nl/id/vh8lnhrrl0g8/beloning_europarlementariers

[7] Research from news outlet RTL Nieuws reported on 27 December 2019. RTL Nieuws found that in 30 Dutch municipalities where over 2,000 burglaries had taken place in three years’ time, not a single suspect had been arrested.

[8] Adviescollege toetsing regeldruk, Actal, reported by nu.nl, 10 April 2017

[9] Chris Kirkham, “Home Builders Say They Are Squeezed by Rising Compliance Costs”, Wall Street Journal, 7 May 2016

[10] Lee Friday, “Forget Guaranteed Income – Governments should stop destroying income first”, 12 March 2019, Mises Wire

[11] As Charles W. Johnson points out, certified public accountants (CPAs) “perform a useful service, but it’s a service that far fewer people, and indeed far fewer businesses, would need, except for the fact that they need help coping with the documentation and paperwork requirements that government tax codes impose. A CPA is essentially someone trained in dealing with financial complexity, but finances are much more complex than they would be in a free society precisely because of government taxation and the bizarre requirements and perverse incentives that tend to make things much more complex than they would otherwise be.” (In: Markets, not Capitalism, p. 65)

[12] “L’État, la grande fiction à travers laquelle tout le monde s’efforce de vivre au dépens de tout le monde.”

[13] Even so, despite their ability to create money out of nothing and to raise taxes, States are also running up debts! All the states in the world together have a debt of $73,000 billion, a banker told me in January 2017. That’s roughly $10,000 per person living in the world today.

[14] In fact they confuse falling prices with deflation. Falling prices can be a sign of a healthy economy, deflation is monetary contraction, which leads to falling prices. In both cases, however, falling prices are a positive, not a negative. See e.g. George Reisman, “The Anatomy of Deflation”, 22 August 2003, Mises.org

[15] I came across an old newspaper clipping the other day, from 25 April 2001, saying that “the French government is raising the compensation that companies must pay when they fire employees by 100%”. It’s just one small example. Obviously entrepreneurs will avoid taking on new employees in reaction to measures like this.

[16] Louis Rouanet, How Central Banking Increased Inequality, 15 August 2017, Mises.org

[17] If you want to get a good picture of how the Keynesian monetary policies of the U.S. government and the U.S. Federal Reserve have benefited the ruling elite in the United States, including Wall Street speculators, at the expense of the ordinary American people (“flyover America”), I recommend David A. Stockman, Trumped – A Nation on the Brink of Ruin and How to Bring it Back, 2016.

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